Realtors Aghast At Notion of Competition

By Steven Pearlstein
Wednesday, May 18, 2005

R.Hewitt Pate will never make the list of aggressive antitrust enforcers. But on his way out the door as assistant attorney general, Pate has launched a laudable campaign to bring price competition to one of the last outposts of cartel-like behavior.

I'm talking, of course, about residential real estate agents and brokers. Theirs is an industry in which consolidation and time-saving technology have not only not saved consumers any money, but also coincided with steep price increases. It is an industry that has used its political muscle in a number of states to ward off competition from discounters. And at a time when the Internet has wiped out legions of other middlemen in other industries while squeezing the incomes of those who are left, the number of real estate agents has continued to climb along with their income.

In recent months, Pate has sent letters to legislators in Oklahoma and Texas warning against adoption of industry-inspired proposals that would have blocked or limited competition from Internet brokers or discounters offering something less than full-service representation. The department also opened an investigation in Oklahoma, where discount brokers claimed that their full-commission competitors were refusing to bring clients to see the houses they listed, in clear violation of their professional duty.

More recently, Pate sued to block Kentucky regulators from banning rebates by real estate firms to their customers. In that suit, the Justice Department cited the views about rebates of a number of agents recently surveyed by the Kentucky Real Estate Commission.

"This would turn into a bidding war, lessen our profits and cheapen our so-called profession," declared one horrified agent.

"They could lead to competitive behavior," said another.

We wouldn't want that now, would we?

Looming large in all this is the Internet, which threatens to break the exclusive hold that local Realtor groups have had on information and information channels vital to buyers and sellers. The Internet has made it easier for buyers and sellers to go through the process without agents. And it has provided an opening for lower-cost brokers offering limited services.

In response, the National Association of Realtors announced a policy at the end of 2003 that would have given traditional brokers the option of withholding their listings on the regional Multiple Listing Services from any brokers they chose (read: discounters). But after more than a year of investigating, Justice last week forced the Realtors to withdraw the new policy.

"We work very hard to get these listings," complains Long & Foster's Wes Foster, reflecting the industry view that such information is the listing agent's private property. "It is simply unfair to require us to pay these 'discounters' to sell us back our own listings."

I have no quarrel with the idea that agents should be paid for their experience, their knowledge and the time they spend developing relationships and showing houses. But we already know that Foster and his agents are happy with the standard practice of taking 2.5 to 3 percent of the sale price as their share of the commission. Why should they care what arrangements buyers have with their agents? The answer is that to most people, it appears as if the seller is paying for the services of both agents -- after all, at the closing, commissions are deducted from the seller's proceeds. But as any economist would tell you, the opposite is the case: It is the buyer who pays through the higher, commission-adjusted purchase price demanded by the seller. That convoluted arrangement misaligns the agents' incentives, stifles innovation and prevents efficient, competitive pricing.

The solution is pretty simple: Have buyers and sellers each pay their own agents at a price and service level they negotiate beforehand. That's the way it works in most other industries. And if the real estate industry was as open to competition and as committed to putting consumers' interests first, that's how it would work for them as well.

Steven Pearlstein will host an online discussion at 11 a.m. today athttp://washingtonpost.com. He can be reached atpearlsteins@washpost.com.


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